Is GOVT Averaging the LOSESS by MERGING SBI and it’s associate banks?

June 16, 16

Is GOVT Averaging the LOSESS by MERGING SBI and it’s associate banks?

Greetings from Hitesh! The Union Cabinet approved the merger of five associate banks -- State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad as well as Bharatiya Mahila Bank with State Bank of India. This news took the market up by 300 points yesterday.

What is our View?

Currently, market is facing severe liquidity crunch and banks are facing issues in recovering their loans. Vijay Malaya is the tip of the Ice Berge. Many of the A group biggies are carrying a huge debt in their books as of now. They are also not able to pay their interest.

Business standard dated 16^th June, 2016 has reported the following

“India’s top 10 business houses are the biggest borrowers from banks but it’s the next 10 — ranked 11 to 20 — which are giving a bigger headache to lenders, as many of these firms are running out of ammunition to service their debt. In FY16, for the first time in a decade, the combined operating profit of the country’s top 11 to 20 borrowers fell short of their interest obligations, leading to potential loan default by some of them. These firms reported a combined operating profit of Rs 26,077 crore in FY16, lower than their interest obligation of Rs 30,351 Crore.”

In such a time CABINET has decided to arrange a MARRIAGE of SBI with its associate!!

Are they AVERAGING the Losses?

Normal guys if they have bought a share at Rs.100 and the price goes to Rs.80, they have a loss of 20%. Now to reduce the loss they do the most foolish thing – buy same quantity of shares at Rs.80. Due to this there purchase average comes down to Rs.90. So they have 10% loss (when you see in PERCENTAGE TERMS) but aggregating loss is the same Rs.20. If the price goes down further – their losses will increase in GEOMETRIC PROPORTIONS.

Our understanding is very simple – if the price has gone down after our purchase instead of going up – IT MEANS OUR CALCUALTIONS ARE WRONG. Most EGO CENTRIC guy would say – “Market is not discounting what we think”. But let me give you good news – market is always RIGHT – our opinion may or may not be!!

With SBI merger – the GOVT may have a LOW NPA in PERCENTAGE TERMS but the AGREGATE NPA will be the same or may increase.

The situation shared by Business Standard pertains to the first 20 corporates. Think of the MID SEGMENT COMPANIES or SMALL COMPANIES. How they will pay?

What will happen due to MERGER?

The GROUP will get BUSY arranging the internal management / incurring the cost of changing boards/ cheque books and many such petty things. They will have to spend huge money on NET INTEGRATION of all the banks. 

When all such things are going on – do you think they will have time to follow up with their DEBTERS?

In fact, due to COMPUTER, most bank employees are forced to handle more than one portfolio and in such a time – they will now be spending their time in just REARRANGING their management system.

Many guys will spend time in getting particular position under new management or at least maintaining their current position.

Overall, the focus will be more inward then outward due to merger processes. The challenge is to steer such a merger as fast as possible and with least amount of cost. I have my doubts whether it will be possible or not?

IDEAL MARRIAGE:-

My personal understanding is that marriage should happen with two equally strong partners where each of them should bring something of him/her on the table. When one partner is strong and other is weak – it becomes the consumer of the strong partner’s strength without bringing something on the TABLE or the STRONG Partner will exploit the WEAK one.

The world which we live in BOASTS about CAPITALISM – but if you look at the USA mergers post 2008 scam or elsewhere in the world – they are done with a socialistic attitude. It’s a backdoor socialism.

Those who think that they can loot Paul to pay Peter – this can’t go on forever.

Looking at this MARCO picture – the greatest of the world investors are SHORTING USA and other WESTERN COUNTIRES STOCKS and buying GOLD.

What NEXT?

If you want to learn the fine art of investments – you can approach us.

HAPPY INVESTMENT TO YOU.

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Live With Passion…Invest With Passion.

Hitesh Parikh.

www.hiteshmparikh.com